Q1 2022 Builders FirstSource Inc Earnings Call
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Good day and welcome to the builders first source first quarter 2022 earnings Conference call. Today's call is scheduled to last about one hour, including remarks by management and the question and answer session in order to ask a question. Please press the star key followed by the number one on your Touchtone phone.
At any time during the call.
I'd now like to turn the call over to Mr. Michael Neese Senior Vice President Investor Relations for builders first source. Please go ahead Sir.
Thank you Priscilla and good morning, and welcome to our first quarter 2022 earnings call.
With me on the call are gate equipment, our CEO and Peter Jackson, our CFO .
Today, We will review our record first quarter results for 2022.
As a reminder, our adjusted EPS calculation excludes amortization of intangibles.
Our first quarter press release on our Investor presentation for today's call are available on our website at investors <unk> com.
The results discussed today include GAAP and non-GAAP results adjusted for certain items.
We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures you can find a reconciliation of these non-GAAP measures to the corresponding GAAP measures, where applicable and a discussion of why we believe that can be useful to investors in our earnings press release and SEC filings.
In our presentation.
Our remarks in the press release presentation or on this call contain forward looking and cautionary statements within the meaning of the private Securities Litigation Reform Act and projections of future results. Please review the forward looking statements section in today's press release.
Our SEC filings for various factors that could cause that could cause our actual results to differ from forward looking statements and projections with that I'll turn the call over to Dave. Thanks, Mike Good morning, everyone and thanks for joining us.
21 was a phenomenal year for our company.
We entered the first quarter of 2022 building on that strong momentum and delivered another quarter of record net sales gross margin and adjusted EBITDA.
We produced strong core organic sales growth of 15%, marking our fifth straight quarter of double digit growth.
Along with our strong start to the year, we continue to invest prudently in our operations and work hard to deliver outstanding service to our customers in the face of significant supply chain constraints persisted throughout our industry.
The success, we've achieved is directly attributable to all 28000 of our hard working dedicated team members, who go above and beyond every day to help us maintain our position as the industry leader.
I'll cover four key topics on today's call.
First I'll provide a quick update on our base business and a record first quarter results.
Second I'll provide an update on our acquisition success and continues to strengthen our premier market position, including our most recent tuck in deals.
Next I'll provide an update on our digital strategy and finally all of those.
Scott our view of the current state of the housing market.
On slide three I've highlighted this important point for several quarters and would like to share that yet.
As we discussed during our Investor Day last December .
Believe it is important to assess our results using a base business methodology to better appreciate the underlying growth and profitability of our company by normalizing for commodity prices.
As a reminder, our base business definition assumes static commodity prices at $400 per thousand board feet.
Turning to slide four over the next four years, we expect our base business to deliver a 10% CAGR on the top line.
15% adjusted EBITDA, CAGR, and importantly, a 50 basis point per year improvement in adjusted EBIT margin for a total of 200 basis points of improvement by 2025.
And our expected full year 2022 base business performance is ahead of these targets.
As a result of this performance, we expect to have 7% to $10 billion of capital to deploy through 2025.
That includes this year's planned capital investments in innovation and organic growth, along with M&A and share repurchases.
Turning to our first quarter results on slide five we delivered strong core organic growth of 15%.
Commodity price inflation added, 13% and acquisitions added 8%.
Our single family core organic growth was nearly 17% once again exceeding the see single family starts rose, which was about 4%.
And our single family core organic growth was double digits across all three of our operating divisions.
Our market multifamily and R&R segments, each grew approximately 10%.
Core organic sales and value added products grew by 31% compared to the prior year period and value added products were the key growth driver across all customer segments accounting for nearly 80% of our organic growth in the quarter.
This is another strong data point that confirms our strategy is working.
Yes.
We delivered record sales of nearly $6 billion in the first quarter and generated $1 billion of adjusted EBITDA with an adjusted EBITDA margin of 17, 6%.
These exceptional results were driven by robust demand for housing.
Internal productivity and ongoing pricing discipline in a volatile supply constrained environment.
Let's turn to M&A.
We remain focused on executing tuck in M&A that delivers a high return.
As you can see on slide six there are more than 1000 potential opportunities with revenue less than $100 million.
Clearly highlighting our future opportunity for growth.
On slide seven last year, we completed seven acquisitions for $1 2 billion.
This year, we expect to invest approximately $500 million in accretive M&A and we're off to a great start.
On April <unk>, we acquired panel trust, a multilocation provider of building components, the single and multifamily markets with seven locations throughout Texas, Georgia, and South Carolina.
The additional components capacity expands our value added solutions offerings in several key high growth markets.
Panel Trust had approximately $138 million in sales last year.
Also on April one we acquired value Trust, a single location provider of building components, the single and multifamily markets in Boise Idaho.
Oily asset housing market is seeing an influx of national homebuilders rushing in to meet a rising global demand.
We're excited to partner with builders to meet their ambitious goals.
Valley Trust sales were approximately $26 million in 2021.
I want to welcome the team members from payroll Trust and value Trust, the BFS PFS family and I look forward to providing future updates on how builders first source will continue to lead the way and consolidating our fragmented industry.
Next I'll provide a brief update on our digital strategy on slide eight as we continue to accelerate our pace of digital transformation.
During our fourth quarter earnings call.
The deployment of paradigm estimate, which we continue to roll out across our operations provide a faster and more accurate customer flows.
Year to date, we have completed 2000 estimates our customer plans across nine states and that adoption will continue to accelerate.
In addition, this process provides the foundation for our Configurable visualization technology can improve design and construction efficiency for homebuilders.
Regarding our visualization technology I am pleased to announce that we have signed an agreement with Hayden homes.
Lower in the Pacific Northwest for the use of our homebuilder.
Homebuilder omni platform.
With their plans of approximately 2000 stars Hayden homes will become the largest builder currently using our digital solutions.
We believe we're making the necessary investments to revolutionize our industry and then our digital strategy is on track to capture an incremental $1 billion growth opportunity by 2026.
Turning to productivity.
We expect to deliver over $100 million in productivity savings in 2022 by continuing to leverage our BFS one team operating system, which we highlighted at our Investor day in December .
We're off to a strong start as an example, our component manufacturing efficiency metrics shows that our board feet produced per hour.
Grew by 19% versus the first quarter of last year.
Our teams work aggressively to maximize the throughput of our existing facilities to meet demand.
Yes.
Over the long term, we are targeting 3% to 5% of annual productivity improvement as our teams work together to leverage best practices and technology, allowing us to become more efficient and productive.
Serving our customers.
Lately, many industry headlines as expressed uncertainty and concern.
From what we have seen across our thousands of customers on home sites that we serve I can affirm that that this industry remains strong under bill and resilience.
I believe the homebuilding industry, we will continue to grow this year and that we will outperform our peers as our platform delivers for our customers and our shareholders.
Despite persistent supply chain challenges and rising interest rates, we are not expecting a significant downturn in housing because we are far healthier and more prepared industry than the last time, we saw a significant downturn.
Our beliefs are supported by three key facts.
First the significant under building of homes that has occurred over the last 12 plus years.
The improvement in underlying demographic demand.
And finally, the credit quality of that demand.
We continue to believe that the U S housing market is significantly under bill.
And while I acknowledge higher mortgage rates will likely represent a near term headwind to satisfying that demand, we continue to see tremendous momentum and long term growth for the industry.
In the first quarter single family homes under construction increased 27, 5% versus the prior year to 789000 units.
As a result of this underlying demand and ongoing supply chain challenges total units under construction hit $1 6 million in March.
The last time this occurred was in the summer of $19 73.
Also.
The cancellation rates have remained low at approximately 8% during the first quarter essentially unchanged from last year and sustaining customer customer demand remains durable.
Turning to demographic growth, we see clearer favorable trends in the most populous age cohort of 25% to 34 year olds. This.
<unk> is moving into the early <unk> time.
When many people start to buy their first homes are moved from apartments or single family homes and.
And we are seeing household formations reflects this demographic shift.
And last month, according to the U S census.
<unk> vacancy survey revealed that all major age cohorts younger than 50 years old posted year over year increases in homeownership.
The first time this has occurred since 1994.
This data indicates the overall financial strength and creditworthiness of today's buyers are healthier and more resilient than in the last cycle as evidenced by the strong consumer balance sheet chief.
<unk>, resulting from the trillions of dollars in Covid relief measures and the low three 6% unemployment rate.
So the homebuilding industry remains well positioned with significant tailwind given the historic under building phase.
Favorable demographics and consumers with strong finances.
As a company we have a long track record of successful execution, gaining share and driving efficiencies through innovation for our customers.
We significantly overachieve, our BMC synergy commitments and are ramping up productivity and operational excellence across the entire organization.
We will continue to focus our efforts on accelerating our growth in higher margin value added products and investing further in our digital solutions platform to advance our goal of transforming the homebuilding industry.
For.
Our 2022, we have increased our outlook and expect strong double digit base business growth and significant free cash flow generation.
We remain committed to deploying capital into high return internal investments accretive bolt on M&A and share repurchases.
Yes.
I'd like to spend a couple of minutes highlighting military appreciation month and its importance to builders first source.
In BFS, we are honored to be a military friendly employer and to be part of the journey for those who have served our country.
One veteran we are particularly proud of as Rodney Hatch, who served as a marine and is now a CD coordinator for multiple locations across our Alabama and Mississippi geographies.
Rodney honors and celebrates or those who are bravely served our country by creating better and walls at our locations. So showcasing those who are now growing their careers with DFS.
The spirit of community doesn't stop with this co workers.
Rodney gets back to local neighborhoods by maintaining blessing boxes, and honor system, food pantries, where people need food and necessities.
And when hurricane either hit the area of last year.
<unk> jumped into action collecting donations from Astellas team members and delivering them to Louisiana and so.
It does all of this on top on top of this vital role in keeping our people safe.
Sponsored <unk> cells at day in and day out.
This safety first mindset in teachings pelleted six locations achieved zero recordable injuries, so far in 2022.
People Rodney are the reason, we continue to see year over year reductions in our reportable accidents as part of our never ending drive to zero.
We are fortunate to have Rodney on our team and I. Thank him for his service to our country and the communities we serve.
And I am grateful to all of our veterans in each of our 28000 plus team members, who embody our core values, putting people first and showing our customers wide BFS is the most valuable partner and our industry.
With that let me turn the call over to Peter to go through a detailed look at our Q1 results and provide an update on our improved 2022 financial guidance.
Thank you, Dave and good morning, everyone. I would also like to take a moment and thank each one of our team members, who delivered an incredible first quarter of 2022.
We are very pleased with our remarkable first quarter results, we remain committed to a balanced approach to capital deployment through 2022 and beyond as we leverage our strong cash flow to make accretive investments in our operations.
Great businesses to the BFS ban all while executing against our share repurchase authorizations.
I will cover three topics with you this morning.
First I'll review, our Q1 results second I will update you on our capital deployment efforts and finally I'll provide you with our updated guidance for the full year 2022.
Let's begin with our Q1 performance on slide 10.
Net sales of $5 7 billion for the quarter, which increased approximately 36% compared to the prior year period.
Core organic sales in the value added products grew by an estimated 38%.
Underlining our work to meet the strong demand across our value added channels and the continued supply chain constraints.
Our focus on value added products continues to strengthen our appeal to customers looking to improve the efficiency on the job site.
Gross profit was $1 8 billion, a 71% increase compared to the prior year quarter.
Margin percentage increased 670 basis points to 32, 3%, primarily driven by disciplined pricing and a volatile supply constrained marketplace as well as effective and timely source.
SG&A was $968 6 million.
An increase of $147 million or 17, 9% compared to the prior year period, driven primarily by acquisitions and variable compensation.
Variable and incentive compensation increased due to core organic growth and improved profitability.
We also made strategic investments in productivity.
<unk> and digital initiatives.
Lastly, fuel related expenses increased by $12 million or nearly 50% due to recent global events as a percentage of net sales total SG&A decreased by 270 basis points to 17%.
Adjusted EBITDA increased nearly 120% to $1 billion driven by strong demand across our key customer end markets higher commodity prices and improved gross margins.
Adjusted EBITDA margin improved to 17, 6%, increasing 670 basis points compared to the prior year period, as we continue to manage spending and a fast growing environment.
Net income in the quarter was $639 6 million or $3 56 per share compared to net income of $172 6 million or <unk> 83 per share in the same period a year ago.
Adjusted net income was $700 8 million or $3.90 of adjusted EPS compared to the net income of $296 3 million or $1 42 of adjusted EPS in the prior year period.
The 136, 5% increase in adjusted net income was primarily driven by the increase in net sales and gross margin, partially offset by higher income taxes and SG&A expenses.
Now, let's turn to cash flow.
Our first quarter cash provided by operating activities was $179 $8 million and cash used in investing activities was $48 $3 million, we generated free cash flow of $131 5 million.
Highlight the fact that we are cash flow positive in Q1 for the first time.
Historically in the first half of the year, we are a net borrower as we make seasonal increases in working capital.
This quarter's positive cash flow really highlights the strength of our market leading platform.
Let's turn to capital deployment.
This year, we have spent approximately $180 million on our M&A transactions, which closed in April .
In the first quarter, we repurchased approximately three 6 million shares for roughly $286 million at an average stock price of $79 58.
In addition, we repurchased approximately four 3 million shares in April 2022 for $266 9 billion at.
At an average stock price of $62 21.
Year to date, we have repurchased $552 $9 billion of stock.
The number of shares repurchased was lower than the past two quarters, primarily due to the timing of M&A and seasonal working capital needs.
Since August 2021, we have repurchased approximately 35 3 million shares of stock at an average price of $65 10.
For two 3 billion.
This represents almost 17% of our total shares outstanding in less than a year.
I am happy to announce that yesterday, the board of directors authorized a new share repurchase program of $2 billion.
When added to the $2 $3 billion already repurchased our authorization provides for $4 $3 billion of total share repurchases.
We remain committed to opportunistically repurchasing, our stock and continuing to create value for our shareholders.
Also on slide 11, our pro forma net debt to EBITDA ratio was approximately <unk> nine times, our actual EBITDA.
Excluding our ABL, we have no long term debt maturities until 2020.
Total liquidity was $1 $2 billion consisting.
Consisting of approximately $900 million of net borrowing availability under the revolving credit facility and $282 million of cash on hand.
We are off to a great start this year the team is driving higher margin products delivering value and efficiency to our customers and our balance sheet remains rock solid.
Let's shift gears and discuss updated 22 full year outlook on slide 12.
We continue to see strong underlying demand and new housing construction.
We are maintaining our estimate of single family starts growth across our geographies in the mid single digits, and R&R and multifamily growth in the low to mid single digits.
As we discussed last quarter, we are providing you with our base business guidance on net sales and EBITDA as we believe this is a better measurement of our performance and assumes constant commodity costs at $400 per thousand board foot.
We will continue to provide you with a commodity price sensitivity chart in our investor presentation to allow you to incorporate your own commodity estimates into your models.
As a result of our Q1 performance, we are increasing our 2022 base business sales growth guidance from 8% to 12% to 10% to 14% or $17 $6 billion at the midpoint.
We are also increasing our adjusted EBITDA growth guidance from 12% to 18% to 18% to 22% or $2 2 billion.
At the midpoint.
Our capex forecast came down $20 million due to supply chain delays is expected to be approximately $390 million in 2022.
This years Capex will be focused on adding capacities to existing and establishing new value added facilities to support growth initiatives that will create capacity for higher margin products.
We delivered $55 million in cost synergies to the P&L in the first quarter fully recognizing the synergy commitments of the BMC merger.
In addition, we expect to deliver over $100 million in productivity savings. This year as we continued to drive improvements across our operations.
We expect to generate free cash flow of two to $2 4 billion in 2022, reflecting higher commodity prices disciplined working capital management, and our ability to capitalize on our industry leading product portfolio.
This is an increase of $400 million from last quarter's free cash flow guide.
Our projected free cash flow assumes average commodity prices in the range of 700 to $1000 for the full year.
We still anticipate working capital coming down due to lower commodity prices in the back half of 'twenty two.
On slide 13, we provide the sensitivity chart I mentioned, providing an illustrative away to think about our total sales and total adjusted EBITDA for the full year 2022 at various static commodity price points.
We believe 2022 will be another strong year of growth. We continue to focus on growing value added products driving operational excellence across the company and delivering innovative technology to our customers.
With that let me turn the call back to Dave for his closing remarks, thanks Peter in.
In summary, the homebuilding industry remains resilient and under built and we believe it will continue to grow in 2022 and beyond.
Our momentum is strong.
Our industry, leading platform is generating exceptional results, which we expect to continue in the second quarter. The remainder of this year.
Beyond.
Our balanced capital allocation strategy is delivering significant value to our shareholders.
We're committed to organic growth investments tuck in M&A and continuing to execute share repurchases to generate accretive returns.
I remain optimistic on the prospects for our industry and I'm highly confident in our company's ability to outperform the market.
Over the long term.
So ill let us please open the call now for questions.
At this time, if you would like to ask a question. Please press the star key followed by the number one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key.
Again, if you would like to ask a question today. Please press the star and one on your Touchtone phone.
And we will take our first question today from Mike Dahl with RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
Set of results here.
So I have a couple a couple of questions on kind of the core and some of the margin trends. So it looks like you converted the core still in kind of mid thirty's or low to mid <unk> incremental EBITDA and maybe a mid teens organic core.
Organic margin.
Youre guiding youre guiding to about 12, 2% core.
For the year in terms of the margin so understanding 15% is pretty exceptional or mid teens is exceptional.
Talk us through the balance of the year and what some of the puts and takes are that bring you down to that full year.
Margin number.
Hey, Mike Yes, it's a good question there has certainly been a lot going on this year as you know the volatility in the markets the supply chain issues, the ups and downs in commodity pricing.
<unk> been looking at is an exceptionally strong first half of the year.
But we knew it would be strong im not sure. We do it would be this strong in terms of the dynamics.
What we're anticipating is that the back half of the year, we'll see some normalization that we'll see.
Sure.
Directional trend in commodity prices back towards.
Our long term estimate around the base business 400 is probably won't get there by year end, but it will head that way. We also anticipate seeing increasing relief in the supply chain space.
The interruptions, we seen historically due to the basically the illness in the manufacturing facilities around some of the components, we need to build homes, that's been improving pretty steadily over the course of the year.
And as you know more capacity either comes onboard or are there supply chain stabilizes, we think that'll normalize things a little bit in the back half as well, but pretty modestly we think for the full year. The underlying market is still strong margins will remain strong.
But it will start to drift back towards a more normal level of Cedar crest.
Okay.
And I guess my second question is somewhat related if I look at your bridge on sensitivities.
Around different commodity price assumptions, both your sales and adjusted EBITDA ranges went up.
A decent amount compared to your prior sensitivities.
<unk>.
How much of that should we think of as being kind of true sustainable improvement in the base versus some of these.
Yes, just first half being so exceptional anchor.
Talking about and some things that maybe still a little more transitory.
Yes, no but again.
The good point is that page is really focused around trying to layer on the impact of commodities over top of the core base business right. So we did call out the base.
Our goal sales and EBIT to be pretty handily beat by about 5% in terms of what we're guiding for the full year that was really based on the Q1 performance. So really thats, a really nice run rate in terms of what we've seen so far that's the biggest kind of underlying factor on slide 13 of the sensitivities.
The only thing I'll highlight on that slide just as a reminder, this is a it's a bit of a blunt instrument. We could get handy. We think is helpful. But just please remember this is a static commodity price snap the line so volatility in commodity prices will move these numbers around.
Right understood Okay. Thanks, Peter.
Thanks, Brian .
And we will go next to Jay Mccanless with Wedbush. Your line is open.
Hey, good morning.
Dave.
Stat again re.
<unk> talked about the amount of homes under construction.
Yes.
Total.
Hum.
$1 6 million.
Yes, it really a remarkable number look at Baxter has been a long time since we've been at this level.
Yes, absolutely.
Yes.
Kind of a follow up to what Michael was asking you. If you have that many homes under construction along with what I think is a pretty heavy permit backlog.
At the builders.
Why I guess why do you think maybe demand <unk> activity slows down a little bit it seems with the builders cancellation rates staying low.
It's hard for me to envision a scenario where unit volumes really take a step back from what we're seeing now.
Yes, I think youre thinking about a ray Jay we're actually not expecting volumes to significantly.
Client this year as Peter mentioned, there is some comparison issues in the back half of the year, we may get it we're hoping for a little bit of a supply chain relief as the year progresses, but we're very confident in not only what we're seeing early in the second quarter, but to your point given the backlog that's out there in conversations with our customers that the environment is going to remain robust here for the rest of the year.
Sure.
Great.
And then in terms of Hayden homes.
That's a pretty big announcement pretty encouraging to see is that they're taking on the full platform.
I guess, maybe what is kind of your thinking on the growth trajectory. There you tested at Hayden for a year and then maybe move to a bigger builder or how should we think about that in.
Getting to that $4 billion in the Omnichannel revenue that you talked about at the Investor Day, how does how does that progress.
Yes, thanks for asking that one we're excited about Hayden and we're certainly excited about the work that we've got going on.
With our digital platform and this is just great.
Ignition of the work and the traction that we're getting in the market.
Hayden this the largest customers so far that we've worked with on digital they are the sixth customer that we have for omni for homebuilders, but by far the largest at this point and it's a really cool story actually legacy paradigm had been working with them.
Our year to 18 months ago, and they kind of lost a little bit of traction until our acquisition of paradigm last summer and Hayden really realize that the ability to build out this platform and with the financial wherewithal that we have and the investment we were committed to making in advancing digital is really what brought them back to the table.
And it allowed us to sign this agreement with them. They also were a legacy BFS customer already in.
In Idaho, So we've got a long standing relationship with them and so it was good to see that materialize into the signing of that agreement for Ami. So we're excited about it.
Second part of your question, we do expect things to ramp up but as Youll recall and we've said this the last couple of quarters and certainly in our Investor Day. This is a year, where we are investing heavily in that platform to build out our capabilities for digital.
And omni and all the other pieces of the digital platform and so as we would expect.
We will see continued customer adoption of this through the course of this year and into next year, but that $1 billion of revenue is really backend loaded in the back half of that period of time, and we've said that from the beginning.
Only because of the digital.
Ramp up that we see coming over the next three or four years. So a lot of heavy lifting on by the team for doing a great job and we're excited.
Sounds great great quarter, and thanks for taking my questions.
Appreciate it thanks Dan.
We will take our next question from Matthew Bouley with Barclays. Your line is open.
Hey, good morning, everyone. Thank you for taking the questions.
Wanted to ask first one on the base business revenue guide some of the components of that.
Seeing sort of the base business sales guidance, 10% to 14% for the year I think you said, 5% to 6%.
From the smaller acquisitions and then obviously you've got the low to mid single digit growth in the end markets.
And if I'm doing the math that implies sort of minimal non commodity inflation and other market share gains I just want to make sure I'm thinking about that correctly and sort of how you guys are thinking about all the pieces there. Thank you.
Yes, Thanks, Matt.
The numbers do include the components you described.
We certainly have had good success in.
<unk> growth on top of our M&A work.
As you described there is certainly some inflationary factors in the market.
Our guide for this year that tends to account for them in a balanced way and kind of forecast that out but as I mentioned, we do see where we.
From the supply chain.
Some of that inflationary influence will start to dissipate timing is a great question and we've tried to incorporate that in the back half in a reasonable way has trended down sort of analytics, but.
That's really what we're trying to account for in this forecast for the remainder of the year.
Understood Okay got that.
And then secondly, the.
Manufactured products and windows doors, and millwork strength.
I don't know kind of a higher level question to the extent you can see this are you finding that.
This is just continuing to be driven by better adoption.
By builders.
Or are you seeing signs that maybe it's a combination of both but are you seeing signs that builders are actually attempting to simplify their product given all the challenges, they're going through with supply chain and so that in and of itself is supporting kind of just increased usage of manufactured.
Across the board I don't know, maybe it's unfair question, but to the extent you can you can say it would be curious.
Your thoughts there thank you.
Totally unfair question, but I'll answer it anyway.
And I think you hit the nail on the head there is really a combination of both and as we've talked for a long time.
I guess the companies in this combination are really stepping on the gas relative to the value add components.
Millwork and we've seen great adoption.
Also last year, given the supply chain constraints, we did see builders become a little bit more agnostic on the products that they have taken.
And also what Youre seeing in our Windows, nor endorsed this quarter in particular things were really tougher year ago relative to supply.
I would say, it's incrementally better now, particularly on interior doors window lead times have come down a bit, but there's still quite a backlog in and in fact some of these products that we're talking about here are actually.
Inhibited the timely closing of homes as we've talked about over the course of the last year. So I think it's a combination of both of those but listen I couldnt be more excited about the momentum that we have around our strategy inside the company.
The way our team members have embraced it and also the way our customers are ramping up because we are saving them time money and labor availability will remain tight and we think these products are very sticky and we've seen that through the course of time and we think there is still a long runway of adoption.
Ahead of us.
Wonderful well thank you Dave Thanks, Peter Good luck guys.
Thanks, Matt Thanks, Matt.
Sure.
We will move next to Keith Hughes with tourists Securities. Your line is open.
Thank you building on the last question.
Your growth in manufactured products has been absolutely outstanding as you've talked to others in the industry and look.
And acquisitions that are coming in are they seeing the same kind of growth.
Growth levels in the market that youre seeing or is this something you need to go for sure.
Well I really can't speak to what our competitors are doing there Keith but I can tell you the phenomenon that we're seeing relative to adoption is not unique to us.
There is certainly unique from how hard we're hitting it from our strategy and the way we're investing I think we have a leg up on our competitors, but with the capital that we can deploy.
Preferentially to value added and we're certainly doing that as we are spending a disproportionate amount of our capital on these assets for both organic growth and as you've seen over the course of time here the acquisitions that we're doing and we will continue to do that through the course of time.
Yes were really meeting a need there.
The amount of stress builders are under to get homes completed.
It's hard on Friday with all of the supply chain disruptions. So this is an area by leveraging what we do best that they can make their lives easier they can be more efficient they can be more effective.
Certainly been really good momentum and we think our positioning strategically as Dave was saying is powerful.
Okay. Thank you and just one follow up your last two acquisitions Express acquisition.
As we look at the announcements in the future.
That's where a lot of dollars just because there's a lot of it is available out there.
Are there areas you think you would send the acquisition.
Out of the manufactured product base.
Yes, I think youll see us again, continuing to invest heavily in value add there are a number of potential targets still out there love our footprint level, we're doing across the country, but we will take opportunities to strengthen the value added side of the business differentially through M&A through the course of time.
Okay. Thank you.
Thank you.
And we'll go now to Reuben Garner.
With the benchmark your line is open.
Thank you and good morning, everybody and congrats on the strong quarter in Alberta.
So maybe.
The gross margin line I don't think I heard any update to the long term.
Outlook, there, Peter but maybe it would help if you could kind of.
I think historically I would think about rising commodity periods like we just had in the first part of the year.
Detractor to gross margin and yet you guys still posted a.
Well over 30% gross margin, which is way above I think your normalized range can you kind of walk through the components therein lies why do you think it's.
So elevated now versus where we are things will normalize when I guess the supply chain loosens up.
Yeah, no. It's a good question and it really does boil down to the dynamics, whether whether it's attributable directly to COVID-19 or the supply chain interruptions post COVID-19.
Combined with that demand that we were referring to in some of our scripted commentary.
The push.
The amount of.
Interest from homebuyers, and the resulting dry by homebuilders to meet that demand has really put pressure on an industry that over the years is just shrunken down his capacity.
Post kind of the Gogo years of the early two thousands so getting to that limit of available capacity is I think a lot of ways just pushed us up the Philips curve as it is what it is we're responding to it and managing it very very well I think.
Staying disciplined disciplined in the way that we purchased the way that we partner with vendors and with customers to keep the supply chain moving the best we can.
But that has certainly created.
There are opportunities along the way.
To to manage profits and to push through.
The product that we know we can get you.
Do you think over time, though that supply chain.
<unk> will start to release, a little bit right.
It will alleviate.
As more product becomes available to more folks broadly in the market. We do think there'll be a normalization. So youre right. We have not updated our normal gross margin guide is still 27% or higher in the long term.
Still think we're on track for our <unk> goals, but there'll be some ups and downs along the way in our estimation.
Got it and then.
Correct.
Could be wrong from the start but I think I saw the Capex guide came in lower.
When you previously were looking at any color there like an inability to get projects.
Don or is that.
Reducing reducing the spend because of the environment any color there would be helpful.
Yes, no. Unfortunately, its really just supply chain, we've got orders out for rolling stock and equipment and buildings and all of these things we're trying to do and unfortunately, its just slower moving that we would we would oppose.
There was an article in the journal yesterday, I think about just how hard it is to get heavy duty trucks.
Times are logging.
<unk> supply chain shortages in that industry are really made it harder on us we're spending more on R&M Im just trying to keep up with the units we have versus getting new ones, we would rather have.
Alright, great. Thanks, and congrats again guys.
Thanks Steven.
We will take our next question from David Manthey with Baird. Your line is open.
Thank you good morning, everyone.
Good morning.
Newer.
Your outlook for $7 billion to $10 billion of free cash flow between now and 2025 could you remind me what single family housing start.
Assumption.
Is that baked into that was at a kind of a low single digit number.
It was yes, yes, okay.
And then.
Does it matter, how we get there. The average is the same does it matter if it's a consistent growth rate or a U shape or.
S shape or something that does it matter over that timeframe, if it's consistent versus more volatile.
No it really doesn't.
It's an endpoint target in 2025, so to your point.
Past that yet there I don't think is important.
And certainly as informative as we go through this process that is a base business sky right. So all of these changes you see in commodities and cash flows along the way as we so far have been incremental but youre right. There is there is there is plenty of opportunity for us to move through unusual market.
Along the way to that ultimate target.
Yes, okay.
Thanks, Peter and then.
Could you potentially bridge SG&A for us versus last year, I'm, just trying to kind of parse out how much is acquisitions versus the core meaning compensation occupancy transportation that sort of thing.
We certainly can I am not sure I can do it off the top of my head. We can we can cover it.
And give you sort of the bigger pieces when we saw our growth or we can get back to you in an email if that's helpful.
Sounds good alright, thanks very much.
Thank you Dave.
And we will go next to Ryan Gilbert with <unk>. Your line is open.
Hi, Thanks, Good morning, guys.
Could you could you offer any.
Commentary around end market core organic growth trends.
So far quarter to date in <unk>.
Yes, so there is.
So it is the.
Right away, we have certainly continued to see strength across the end markets.
They are there are certainly regional strengths that we notice.
I would say that the central and south part of the country.
Certainly doing the strongest but all of the markets are up geographically.
Some mix between products some mix between what we're seeing in sort of the single family core, which I think is really good momentum versus the R&R, which we think I think we've seen some ebbs and flows.
Whenever you see significant increases in commodity prices for example that can sometimes but a headwind on the total demand.
But on average the total everything.
Each one of the pieces and in total everything is green and positive year to date, so far good momentum and as I said right. All three of our operating divisions West Central and East had double digit core organic growth in the quarter. So so Peter pointed out very consistent some ebbs and flows and certain geographies, but very strong overall.
Okay great.
And I guess, considering the increased adoption in.
Value added manufactured products are you seeing.
Any changes in builder interest levels.
<unk>.
Looking at more vertically integrated Offsite solutions.
Well I certainly think they would take it if we can build it fast enough.
The challenge today is really just getting the capacity on the ground and available to the shortened the existing lead times, but it's.
What I think is important to highlight here is that it's really opened the eyes I think of more builders than ever to the advantages.
To what Offsite fabricated components to do for for builders, who want to professionalize be really good at their market.
Our contrast of homebuilding.
Okay, great. Thanks very much.
Thank you.
And we will move now to Adam Baumgarten from Zelman Your line is open.
Hey, good morning nice quarter.
I guess I'll start just could you give us a sense for how much price inflation contributed to the core organic sales growth of 15% in the quarter.
It's an important part of it no question, we haven't broken out the PVM, we might at some point in the future, but it was meaningful.
Okay got it and then just given the free cash flow outlook and the incremental $2 billion authorization is there any reason to believe that share repurchases in 'twenty, two wont be at or above 21 levels.
While we certainly wont give specific guidance on that but.
I will say that our strategy is consistent.
<unk>.
Going off script on this we're going to prioritize investing in the company, making sure our debt is in the right position, making sure our investment in organic internal growth is right.
We are committed to continuing to do smart accretive tuck in acquisitions, we're going to continue to do that as you've seen.
But we're generating a lot of cash and we think our stock is undervalued and we've highlighted that as a pathway that we think is a smart thing to do for investors.
Got it thanks.
Thank you.
And we will go next to Trey Grooms with Stephens. Your line is open.
Thanks. This is norm accounts go on for Trey and good morning, and congrats on the strong results.
Good morning, Thanks Noah.
First question.
It sounded like Youre anticipating.
Chain normalization here in the back half of the year do you think youll start to see gross margins get closer or even be at 27%, maybe as we exit the year.
I do think there'll be some normalization I don't think were going to get all the way back there are certain products that will remain elevated for some time.
Just got it barring a significant change that we don't really see comment.
That would indicate that the other products would bring it down somewhat but I would say at this point no. We don't think that 27% by year end is right.
But a trend in that direction is reasonable to expect.
Alright that makes sense and then on my follow up I was hoping you could kind of frame the magnitude of the.
Past the expansion that you're doing in value add and if we continue to see this kind of growth do you think you will run into any.
Pasty constraints, where you can get that new capacity online as we look out for the balance of this year.
Well, we certainly have capacity constraints now our lead times are longer than we would like them to be.
We look at ways to improve our ability to deliver to customers all over the country, Dave talked about our board feet per man hour productivity metric, where we're trying to get to.
More production out of the same.
<unk> talked in the past about adding shifts we continue to do that we continue to add lines and we continue to add plants. So.
We're double digit equivalent plants.
In any given year in terms of everything we're doing.
But then that is that comes with its own challenges in terms of available components to put into that.
The people, we need to do that but.
But it is certainly a focus on meeting that that demand because it's <unk>. It's.
It is impressive right now and it's something that obviously, we could very well and it has a disproportionate amount of the capital we're spending in total for the company decided to those value added products.
Alright Thats helpful. Thanks for taking my questions and good luck with the rest of the year.
I appreciate it.
Hugh.
We will take our next question today from Kurt Yinger with D. A Davidson your line is open.
Great. Thank you and good morning, Peter.
Good morning.
Here in Q1, there's been a lot of grumbling on the distribution side just around material availability.
No comments around.
Kind of along the lines that we have.
More we could sell it and perhaps that's the case for you as well, but I think the growth pretty clearly highlights that youre getting more than your fair share of that vendor supply and I was hoping you could just talk about what you think is driving that and what it says about DFS platform.
Yes, very good question and you've commented on this in the past I think the strength of our platform since the merger is enabling exactly what you highlighted there which is we believe we're getting a disproportionate amount of share from our suppliers. These are long standing relationships.
Importantly, they are symbiotic relationships, we are equally important to our suppliers as they are to us and we've got really good momentum in those relationships to your point around supply I think incrementally I would say as I said.
I think I commented earlier windows were slightly better than they were a year ago interior doors lumbers more readily available but to your point I would expect things like engineered wood products to be constrained in supply for a long time to come.
Exterior doors are still tight siding and trim are difficult some of that so some of those products or even still on allocation. So it really is a mixed bag and when we say we're incrementally better than we were a year ago. I mean exactly that some are some are better some are no better.
Some that are no better. Unfortunately, we think are going to be entitled supplier for quite some time to come.
Great. Okay. Thanks for that Dave and then Peter.
Peter just a follow up on the normalized gross margins and where you've been running over the last couple of quarters are there any product categories that really stick out in terms of <unk>.
Inefficiently outperforming worse has it been pretty broad based.
It's pretty broad based I would say that the timing of different products and how they move throughout the last year and a half have been.
But I think it's fair to say that it's a pretty wide range pretty broad brush.
Increase in pricing that we've seen.
Come through the channel.
Got it okay, well I appreciate all the color and good luck here in Q2 guide.
Thanks, so much.
And as a reminder, if you would like to ask a question. Please press the star and one on your Touchtone telephone we will go next to Colin Darrin with Jefferies. Your line is open.
Great. Thank you for taking my question and great quarter.
I just wanted to turn to the productivity improvement you talked about how you've hit your BMC synergy target and you're pivoting to more.
Productivity can you just talk about some of the larger examples you have I know you mentioned the increased throughput.
Then any color as to what that 3% to 5% of annual productivity improvement translates into dollars on annual basis, and what that does to your long term incremental EBITDA margin guide for the base business.
Yeah. Thanks, Alex So the productivity is an exciting part of the business I think there is.
A lot of history in our company at finding ways to drive improvement and we think we have a real opportunity at this stage at our scale to really share those best practices and leverage people process and technology to continue the momentum that we see with the synergy savings from BMS.
<unk>.
It's a variety of things.
Process is.
Redesigning certain things that we work on but it hits a lot of different areas right as is reporting driving over time is changing the architecture of certain organizations.
Improving our ability to optimize our tax rate is they're all things that we think are going to drive the business.
Over the next.
Long range of time, good businesses do it regularly year end year out and we certainly think that we have the capability to do it what we're looking to do is make it a more of a normal part of our cadence and less dependent on big acquisitions.
The catalyst for that so.
We did build number into our long range plan. So we certainly have accounted for that SG&A improvement in the numbers.
Sure.
To be candid and tell you, it's not equal to the 3% to 5% target we're going to set for ourselves we're going to be more aggressive with what we push for.
And we're going to commit to our long range plan housing a number lower than that but success. Nonetheless, so we certainly feel good about it and we feel good about our track record in being able to to continue to drive those types of improvements.
In a variety of areas.
Okay. That's helpful color and then I guess, just turning to the macro environment quickly I know theres a lot of debate out there about housing and concerns around what happens to <unk> margins of new resi volume start to decline. So I was just hoping you can give us a little bit of color as to what levers you can pull to adjust to that kind of declining volume in.
Environment to protect your margin and just help us think about how resilient your EBITDA margins would be if we do start to see any volume declines.
Yes, I mean thats a good question well, while we're not at all concerned with what we think the market is doing or whaler, where it will go. We're also not blind to the idea that this is sick.
Cyclical business at times and mortgage rates are going up so we are going to fall back onto the playbook.
Leadership that were.
We're so lucky to have we have a lot of experienced leaders that have been through these types of situations before.
When we look at our ability to perform we're certainly very very pleased with our starting point.
To be more specific we are clearly a.
A better scale, a more efficient and leaner organization.
We have better analytics, and a better ability to monitor our performance than at any point in our history, we've taken out what is over.
$500 million in costs as a result of the combined mergers over the last five years to 10 years those are.
Really important things to consider when you look at what our business will perform.
How our business will perform in the face of a headwinds environment.
More specifically, we have some really obvious actions right, we manage variable expenses every day and.
And as the volumes of our business shift we're going to stay very focused on making sure we're sized accordingly.
At our scale, we have a lot of pathways available to us.
Also talked about operational excellence and protium productivity those are important characteristics.
We will leverage into any sort of headwind to environment.
And the other factor to think about is that when we are investing in our company. The biggest investment we make in any given year is really around working capital.
And that working capital that we fund as we grow this business comes back to us in those moments when the business six downturn, we've seen in past years.
A good job at it and we know we can do it in any environment. That's certainly something that I think is important for investors to keep in mind, just how much cash we spin off in any sort of downside environment.
There are more on the list of things, we can do but we are certainly prepared.
For any sort of downturn at the same time, we're confident.
The market is strong and our momentum is very very good in this market today.
Great. That's really helpful color. Thank you have a good one.
Thanks, a lot you too.
And we will take our final question today from Alex Rygiel with B Riley Your line is open.
Thank you very nice quarter and thanks for taking my question can you expand upon how PFS is going to get paid for Ami and digital platforms and then how should we think about the profitability of this business. The comparison of the legacy BFS business.
Yes, so the nature of our committed.
Improvement in performance and financial performance when we did the paradigm announcement and subsequent to that we feel good about confirming our estimates that $1 billion of increased sales by year five is primarily driven by increased pull through.
What BFS cells. So if you think about what we're offering into the marketplace is improved capabilities for homebuilders and homebuyers to make the build process more efficient.
It's taking plans.
Having configurable visualization is a powerful tool, especially when you landed structural design.
And that capability is unique and it's powerful in terms of what it allows us to do for our customers. It allows us to offer more options.
It allows us to offer more value add it makes us more efficient and our ability to give good quotes and be better partners for our customers and it's just easier to place an order.
Year to work with us when Youre leveraging those technologies that paradigm has developed so that's where we believe we're going to make armani is incremental sales in those core business markets in value add.
Bill anymore, we will certainly see licensing revenue. We think there are there other revenue streams through the paradigm.
Platform, but initially that's the biggest impact in terms of what we've committed.
Thank you very much.
Thanks Al.
And this does conclude our Q&A for today I will turn the call back to Michael Neese for any additional or closing remarks.
Thanks, Brazil, and thank you for your time today and for your interest in <unk> have a great day, we will be in New York City Tomorrow for the <unk> <unk> conference and we hope to see you there. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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